The Productivity–Pay Gap

Updated July 2019

Most Americans believe that a rising tide should lift all boats—that as the economy expands, everybody should reap the rewards. And for two-and-a-half decades beginning in the late 1940s, this was how our economy worked. Over this period, the pay (wages and benefits) of typical workers rose in tandem with productivity (how much workers produce per hour). In other words, as the economy became more efficient and expanded, everyday Americans benefited correspondingly through better pay. But in the 1970s, this started to change.

The gap between productivity and a typical worker’s compensation has increased dramatically since 1979: Productivity growth and hourly compensation growth, 1948–2018

Notes: Data are for compensation (wages and benefits) of production/nonsupervisory workers in the private sector and net productivity of the total economy. “Net productivity” is the growth of output of goods and services less depreciation per hour worked.

Productivity–Pay Tracker

Change 1979–2018:

Productivity

+69.6%

Hourly pay

+11.6%

Productivity has grown 6.0x more than pay

Since 1979, pay and productivity have diverged.

From 1979 to 2018, net productivity rose 69.6 percent, while the hourly pay of typical workers essentially stagnated—increasing only 11.6 percent over 39 years (after adjusting for inflation). This means that although Americans are working more productively than ever, the fruits of their labors have primarily accrued to those at the top and to corporate profits, especially in recent years.

Why this happened—and how we can fix it

Rising productivity provides the potential for substantial growth in the pay for the vast majority. However, this potential has been squandered in recent decades. The income, wages, and wealth generated over the last four decades have failed to “trickle down” to the vast majority largely because policy choices made on behalf of those with the most income, wealth, and power have exacerbated inequality. In essence, rising inequality has prevented potential pay growth from translating into actual pay growth for most workers. The result has been wage stagnation.

For future productivity gains to lead to robust wage growth and widely shared prosperity, we need to institute policies that reconnect pay and productivity and restore worker power, such as those in EPI’s First Day Fairness Agenda and the Agenda to Raise America’s Pay. Without such policies, efforts to spur economic growth or increase productivity (the largest factor driving growth) will fail to lift typical workers’ wages.

Resources

Rising wage inequality has been a defining feature of the American economy for nearly four decades. Although we are seeing broad-based wage growth in 2017 data, ordinary workers are just making up lost ground rather than getting ahead.

First Day Fairness is the right of all workers to a fair system of work from their first day on the job. EPI’s First Day Fairness Agenda is a systematic, wide-ranging policy agenda to shift economic leverage back to workers.

Broad-based wage growth is the key to reversing the rise of income inequality, enhancing social mobility, reducing poverty, boosting middle-class incomes, and aiding asset-building and retirement security.

Wage stagnation is not inevitable. It is the direct result of public policy choices on behalf of those with the most power and wealth that have suppressed wage growth for the vast majority in recent decades. Thus, because wage stagnation was caused by policy, it can be alleviated by policy.

EPI is an independent, nonprofit think tank that researches the impact of economic trends and policies on working people in the United States. EPI’s research helps policymakers, opinion leaders, advocates, journalists, and the public understand the bread-and-butter issues affecting ordinary Americans.